As we discussed in Part 1 of this blog: https://www.pandbifa.co.uk/where-are-we-now-part-1/ , I had the privilege of listening to a great interview held between Karen Ward of J. P. Morgan and Dr. Gertjan Vlieghe, a voting member of the Bank of England’s monetary Policy Committee. This blog covers the second half of the interview, which I have based on my notes and which hopefully does not distort the discussion. To re-iterate, the following is based on my interpretation and I believe I have been faithful to the key content and questions and answers discussed.
Karen raised the topic, ‘About negative interest rates and stimulating growth?’
Gertjan responded, ‘Macro Economists think about ‘real interest rates’. These have been around for a while. It’s (about) nominal interest rates at 0% or below. If you lower interest rates further, banks will start to lose money, lose deposits and therefore can’t lend.’
‘In reality, (in Europe) there has been no large-scale withdrawal of deposits. People/corporates are willing to pay to keep deposits in the banks. Is the UK fundamentally different? Probably not. So, it (negative interest rates) could achieve further stimulus to the economy.’
Gertjan continued, ‘My reading and very extensive studying found that it did not impede lending and it did not reduce bank profitability. It worked as intended. The risk of unwinding macro stimulus is low’, (in Gertjan’s opinion).
Karen then asked, ‘But has it worked?’ (in Japan and Europe)
Gertjan responded, ‘The question is, if negative interest rates were never used, would it be even worse? Actually, it would have been.’
Karen went on to enquire, ‘How will this interest rate persist? How will it reverse?’
Gertjan answered, ‘I am a believer in the ‘low for long’ story and the importance of demographics. We have seen a big increase in longevity without a commensurate increase in the retirement age. Reduced capital amounts for businesses and increased need for savings generates a world where the equilibrium for interest rates is very low. Look at what is happening in Japan – look how their interest rates are.’
Gertjan further discussed the global ageing demographics, except for the Middle East and Africa, who are much younger. He added ‘The one way to adjust this is to increase the pension age.’ He did not clarify whether he was referring to the State Pension age or the minimum pension age – probably both!
Karen then went on to ask, ‘What are the Bank’s specific forecasts for inflation?’
Gertjan replied, ‘Now at 0.5% for the next two quarters, then it will rise and be roughly at target in 2 years and slightly above in 3 years.’
Karen continued, ‘Is there a risk post-vaccine of seeing a bottleneck-demand pushing up against supply?’
Gertjan responded, ‘If inflation is rising because the economy is roaring back, we will take action. The Covid shock is dominant on demand but there is some element of supply shock. We are looking for a sustained inflation affect.’
Karen moved on and asked, ‘Climate change – who’s responsibility is it?’
Gertjan replied, ‘It is not for the Bank of England to decide how green the economy should be – it is political. We (the Bank of England) have a mandate for financial stability. If you look long-term, certain assets could potentially lose a lot of value. Fund Managers should take this risk seriously, so you don’t start losing money. We (the Bank of England) want to lead by example – everybody should do this kind of reporting.’ I believe he was referring to environmental-based reporting.
One of Karen’s final questions on the matter was, ‘Should we review our framework and targets?’
Gertjan answered, ‘The Government sets us an inflation target of 2% CPI. It’s OK for us to periodically review our toolkit.’
Summary
The whole interview was just over an hour long but was well worth listening to. I understand that Gertjan is only one voting member of the Bank of England’s MPC, but if they all have his level of understanding and grasp on the issues and potential solutions, then I think we are in good hands.
The Bank of England’s independence and the range of tools available to them will help the Government with their drive to get the UK economy fully recovered as soon as possible.
We still have our headwinds, but distribution of vaccines will considerably aid our recovery here in the UK and globally.
Steve Speed
16/11/2020